Ralph Acampora: Look for New Leading Sectors to Emerge From Any Downturn

The recent erratic activity of the stock market, with its repeated failed rallies and big point swings, signals a correction may already be under way, according to technical analysis expert Ralph Acampora, senior managing director at wealth management firm Altaira.

But there's a silver lining. Acampora, writing in his monthly Technical Market Letter for the New York Institute of Finance, said investors should be on the lookout for new leading stocks to emerge when the downturn — which he thinks will be a mild one — inevitably ends.

"Like these two sell-offs, this correction is long overdue and very important in identifying new leaders — it is during corrections that 'rolling rotation' between sectors will emerge and give further life to this secular bull market that commenced in March 2009."

In the meantime, Acampora said breaches of the Dow's 50-day moving average are likely to lead to a further fall to the average's 200-day moving average. Only about 5 percentage points separated those two moving averages prior to the Federal Reserve's meeting this week.

For the correction to end, Acampora said the Dow Industrials and Dow Transports must end their current divergence, which is a key element of the Dow Theory.

As for what may happen next, Acampora cited an old Wall Street adage: "During a market sell-off/correction, the sectors that go down the least and/or suffer minimal technical damage are the new leaders."

He noted that during the turbulence of late May and early June, the technology and industrial stock sectors declined the least, while the telecom and utility sectors lost the most.

Woody Dorsey, president of Market Semiotics, a research firm that analyzes market psychology, is less optimistic, according to USA Today.

"The market is in the late stage of a mania," he explained. "There could be more gains to come. But the resolution will be a very severe correction. And I think it will happen in the next few months."

As evidence, Dorsey noted too many investors are adhering to the same bullish story lines that central banks will do "whatever it takes" to support the markets and that there is no alternative to stocks.

Further, he told USA Today, current record-setting market highs are "outliers" and exceptions to normal stock market moves and that current levels are reminiscent of earlier tops.